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July 23rd, 2014 |
By Lynne Pulford, SVP, Mortgage Division Manager
As a mom of a daughter who recently purchased a home, it was important to me that my daughter had a good understanding of the responsibility that comes with home ownership as well as the obligation to a mortgage. First, we agreed she would live with me for one year, with no rent payment, while putting the estimated monthly payment for a mortgage into a savings account. I also encouraged her to participate in both the financial and physical responsibility of the maintenance of our home throughout the year. During that time, we also talked about monthly utilities, surprise expenses, and the importance of a cash reserve to fall back on when you are presented with those surprises.
Often, I hear from parents who want to help their children buy their first house. Whether it’s through ‘been there, done that’ advice or financial contributions, there are a variety of ways parents can help their children achieve their home ownership goals.
Give a gift
If a parent wants to assist their child with the down payment portion of their first home, they are able to contribute up to $14,000 without a gift tax implication. However, a second parent can also contribute up to $14,000 also for a total of $28,000 without affecting the gift tax exclusion.
Another option is FHA Loans. Along with their children, parents can cosign an FHA mortgage which may help a borrower qualify for more than what they would qualify for on their own. If parents are willing to assist further, an additional sum of money can be put down, reducing the LTV, and thus reducing the risk quotient. That being said, please keep in mind that the non-occupant co-borrower is still equally liable for the note repayment.
Have your child pay a practice mortgage. While they’re still living at home, have them pay you their estimated mortgage amount for a few months before they buy their house. This practice helps the child understand the changes in their budget once they move out. As an added bonus, you can save this money for them and it can go toward their down payment or closing cost. A recommended place to save this money truly depends upon the time between payments and the eventual purchase. Regardless, a short term savings vehicle is an appropriate storage place. To ease the documentation burden, both the parents and the child should be joint owners of this account so when the time comes to make the payment, the funds can be treated as the child’s own, instead of gift funds.
Purchase & Rent
One last option is to purchase the house outright and charge your child rent to live there. Gift tax can be avoided by giving the child a deed amount of $14,000/year until they have achieved 100% interest in the house. If you are in a financial situation to afford the purchase of the house and your child is not, this may work best until your child is ready to take full responsibility for the mortgage.
Having these conversations with your adult children is vital in choosing the best option for assisting in their home ownership goals. I’m glad I did – in the end, my daughter was able to pay a substantial down payment, purchase items needed for her new home, and have a six-month reserve in her savings account. Most importantly, she has an understanding of the responsibility she has taken on and what it truly means to be a homeowner.
To learn how Sandy Spring Bank can help you with your home ownership goals, click here: